The Art and Science of Platform Business Models

The terms Marketplace and Platform are often used interchangeably in the context of business models involving a middleman.

While they share many similarities, including the presence of take rates and network effects, they sit on unique points along the middleman spectrum.

It’s always dangerous when you attempt to define something that comes in many flavors, but hold my beer:

What we’ll cover today includes a breakdown of how platforms make money, and how they fundamentally differ from marketplace models.

Here’s what we’ll tackle:

This one is for the true business model dorks, so tie your shoelaces tightly and don’t chew gum.

Platform businesses commonly derive revenue through a take rate applied to an overarching subscription model, compared to marketplaces who usually apply a take rate to a transaction based model.

For example, Patreon, a platform, receives 5% of the creator’s monthly subscription payment. Comparatively, Fishingbooker, a marketplace, receives 15% to 30% on each fishing trip that gets booked.

Platforms often benefit from the recurring nature of transactions. Marketplaces may be re-occuring (transactions happen more than once), but not necessarily at the same amount or time.

Another example, Substack, a platform, receives 10% of the creator’s monthly subscription. StubHub, a marketplace for tickets, receives 20% to 30% on each ticket sold.

In this sense, platforms increase their revenue by increasing active subscriptions, while marketplaces increase their revenue by increasing throughput.

Another way platforms monetize is through advertising, with YouTube being the prime example. Creators share in the advertising revenue that their videos earn. And viewers are, in a sense, the product, since their eyeballs increase advertising revenue that the platform and creator share in.

The above diagram is the YouTube relationship in a nutshell.

Advertising can also come in the form of preferred results, where the supplier selling goods bids for preferential search placement. You see this with Amazon, who will show you certain brands of digital cameras before it defers to the rating algorithm.

And finally, for some platforms, the ad itself can be the content:

Substack differentiates itself from other creator platforms by offering writing, podcasting, and now video infrastructure to its creators. It would be expensive for a creator to cobble together a similar set of tools on their own, so it makes sense to share their revenue with Substack, who can amortize the cost of all this development over a large user base.

And Platforms that allow the supply side to not just distribute their product, but also create an enhanced version of it, are able to charge a higher take rate.

For Platform businesses, everything comes back to retention - retaining both the supply side and the demand side.

Platform businesses incur costs related to technology maintenance, R&D, and scaling infrastructure to serve a growing user base, as suppliers attract and nurture more customers.

Marketplaces spend lots of money on user acquisition, since in addition to providing a technology they are also responsible for driving incremental business. That’s a key reason why Marketplaces are generally able to charge a higher take rate than Platforms - they aid in demand generation.

Platforms, on the other hand, are a place to set up a shop and bring your own customers, to a large degree (BYOC).

Now, this isn’t categorically true. Some Platforms, like Substack and their recommendation feature, do drive demand, blurring the lines between the two models.

However, I’m not aware of many people who go to Patreon for discovery - they go there because they heard their favorite comedian is there.

But to paint in broad strokes, and for the sake of this breakdown, Platform users shoulder a bigger weight in terms of bringing their own demand to the party.

Cameo is more of a marketplace - you go to browse what B list celebrity can make your friend a happy birthday message, rather than showing up with a specific person in mind. Because Cameo provides this lead gen to its suppliers, it elevates their take rate (Cameo charges 20% vs Patreon’s 5%). The proof is in the unit economics.

But with great take rate comes great responsibility - Cameo is therefore responsible for balancing liquidity on both sides. Celebrities (the supply side) are going to stop offering their services on Cameo if they aren’t getting any fan engagement. Patreon creators, on the other hand, have no one to blame but themselves if no one shows.

To use another example, AirBnB knows that they need roughly 300 choices in a single area to make it attractive enough for someone to find what they are looking for. They invested heavily in supply acquisition to provide sufficient match making probability.

On the other hand, Slice, a platform for pizzerias to take orders and payments online, isn’t going to necessarily help you sell more pizza - they are there to provide the infrastructure, not the lead gen. I, for one, have never gone to Slice’s website to find a pizzeria. I only know of them because they charge my credit card when I order online from my favorite joint down the street. As such, they charge a much lower rate.

Back to the retention piece - since Platforms share in subscription fees, they are heavily incentivized to keep customers around once the supply side (e.g., creator) gets them there. You see this in action when Substack jumps through hoops to minimize delinquent churn due to credit card expirations. They run a tight Dunning Process.

Retention also matters a ton for a Platform like Twitch. If they provide a poor user experience and videos won’t buffer, both the supply and demand may bounce for competitor YouTube live. And that hurts - a 50% take rate on $0 is $0.

Perhaps the main difference between the models is who is in charge of payment. Marketplaces generally play an active role in the transaction itself, while platforms are less likely to step into the oncoming traffic that is payment flow. For example, on Substack I own my own Stripe account, which then integrates with Substack, but does not run on Substack or belong to them. I could walk away with my customers and their subscriptions.

However, if there’s fraud (a fake payment made, an incorrect amount entered - which did happen to me once - someone accidentally paid me $202,000 and when I refunded them I had to sort through a multi thousand dollar processing fee) the risk is on me. Mostly LLC is the merchant of record, not Substack Inc.

I really like the supermarket vs farmers market analogy here. You pay Publix for your bananas at the front counter, even though they are from Chiquita. At the farmers market you pay the banana stand individually - you don’t check out at a centralized location.

And if you get sick and want a refund, you wouldn’t go after the farmers market organizer - you’d go after the banana stand who you transacted with.

Being the merchant of record means more risk (especially if there are physical returns involved). And more risk means you deserve a higher take rate.

A marketplace has both the benefit and responsibility of controlling the payment process, whether it does so directly or via a third-party service. A platform brings together buyers and sellers—and provides tools that enrich the experience—but it generally does not play a direct role in the final steps of a transaction

That’s a wrap in our month long series on Network Effects. If you want Parts 1 through 3, go for it: